After the meteoric rise of master limited partnerships (MLPs) in the oil and gas industry in the past decade, the full potency of MLP-buying power has become apparent, with E&P transactions gathering strength. Since 2011, about 50 transactions worth roughly $13 billion have filled the ledgers—and that doesn't include Linn Energy LLC's $4.3-billion deal to acquire Berry Petroleum Co.
While the majority of MLPs are focused on the predictable income of midstream and downstream activities, E&P MLPs have expanded, with four new initial public offerings (IPOs) since 2011. Older E&P MLPs have been growing and as a whole have been aggressively acquiring assets for distributable-cash-flow stability and growth.
Currently, 11 actively traded public E&P MLPs tout a total market cap of $20 billion (excluding Constellation Energy Partners and Pioneer Southwest Energy Partners).
In the past 12 months ending in July, 17% of all domestic reserve-based transactions by value have been acquired by MLPs. Purely on a deal-count basis, this figure rises to 24%, making the MLP market a significant component of the A&D world.
More competition
E&P MLPs have been acquiring assets in several regions, with recent activity strongest in the Midcontinent and Permian. However, the A&D market for E&P MLPs is becoming increasingly more competitive. With the surge of private equity in the market, many private C-Corps are bidding on asset packages with a high component of proved developed reserves for their stable cash flow and a bet on commodity prices. Canadian royalty trusts and “private MLPs” are also in contention for traditional E&P MLP assets and are showing up with strong bids.
MLPs are generally cash-flow buyers and are commodity agnostic. Yet recent transaction trends have favored liquid-weighted properties.
So far this year, more than two-thirds of E&P MLP transactions have been predominately liquid-weighted.
Although drop-down acquisitions from private-equity sponsors provide an acquisition pipeline and visibility for sponsored MLPs, in the past 12 months E&P MLP activity has predominately consisted of third-party transactions. On a value basis, transactions were split
75%/25% between third-party transactions and drop-downs. On a deal-count basis, the divide narrows slightly, with a 70%/30% split. From a deal-flow standpoint, public E&Ps account for the majority of total transaction value over the past 12 months, while private E&Ps, when including undisclosed sellers, have been the most active asset sellers with 56% of the deal count. Still, even though E&P MLPs have a cost-of-capital advantage due to their public market financing, that does not guarantee they will be the winning bidder.
The technical personnel of the various competitors for these types of assets consider various factors when evaluating an asset package. These include commercial assumptions (eg, operating costs, capital expenditures, etc.), location of the properties, how the assets fit into the MLP's current asset base and the operational experience the technical team possesses with similar properties. MLPs continue to provide an attractive investment for yield-oriented investors and play an important role in the A&D market for mature, highly developed oil and gas properties. —Christopher J. Simon, managing director, co-head of acquisitions and divestitures, Raymond James|Albrecht
For details on assets on the market, see A-Dcenter.com.
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